U.S. Income Tax Concerns with Regard to Foreign Investment in the U.S.

Braverman Sachs Group Real Newsletter, Market Report/Spring 2011

To assist the foreign investor in understanding the U.S. federal tax consequences of her investments in the U.S., this article will provide the foreign investor with a brief overview of the U.S.’s taxing jurisdiction over the foreign investor. *

a. Limited Taxing Jurisdiction over the Foreign Investor

For the most part, the U.S. will tax the foreign investor only on the foreign investor’s income that arises from U.S. sources.  In contrast to the limited taxing jurisdiction over the foreign investor, the U.S. generally taxes its citizens and residents (“U.S. Persons”) on their worldwide income.

b. Taxation of Income Effectively Connected with a U.S. Trade or Business

The U.S. taxes the foreign investor’s income that is effectively connected with the foreign investor’s U.S. trade or business (“ECI”) at the same rates as it taxes U.S. Persons.

c. Taxation of Fixed or Determinable Annual or Periodical Income

The U.S. subjects the foreign investor’s gross fixed determinable annual or periodical income that is not ECI and that arises from a U.S. source (“FDAP Income”) to a 30 percent tax.  Because this tax applies to gross, as opposed to net, income, the foreign investor is not entitled to deductions from his FDAP Income. Specific items of FDAP Income include interest, dividends, rents, salaries, wages, premiums, and annuities.

d. Taxation of Capital Gains

In general, the U.S. does not tax the foreign investor’s capital gain on the disposition of U.S. property unless the capital gain is ECI, resulted from a disposition of a U.S. real property interest, or both.

e. Exemption of Certain Types of Income

Interest that is not ECI on bank deposits in U.S. banks and that is paid to the foreign investor is exempt from tax in the U.S.  In addition, U.S. source “portfolio interest” (certain types of debt obligations) that the foreign investor receives is exempt from tax in the U.S.

f. Effect of Treaties on General Rules Regarding U.S. Taxation of the Foreign Investor and Home Country Taxation of the  Foreign Investor

Both the U.S. tax law and the foreign investor’s home country’s tax laws may tax the foreign investor’s income from U.S. sources.  As such, double taxation may result.  An income tax treaty between the U.S. and the home country of the foreign investor may minimize or eliminate the foreign taxpayer’s tax liability either in the U.S. or in the foreign taxpayer’s home country.

Countries with which the U.S. has income tax treaties include Canada, Venezuela, Russia, Germany, and Italy.  Countries with which the U.S. does not have income tax treaties include Brazil, Uruguay, and Argentina.

*This article examines only U.S. federal income tax issues of individuals.  It does not address any other taxes.  I encourage that you discuss your specific issues with Florida attorneys and accountants and with attorneys and accountants in any jurisdiction to which you are connected.

**This article contains legal and tax information, but neither tax nor legal advice. To ensure compliance with requirements imposed by the IRS under Circular 230, Rumbak Law, P.A., informs you that any U.S. federal tax advice contained in this communication, if any, unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any matters addressed herein.

Neil Rumbak and Rumbak Law, P.A., are not affiliated with Better Homes and Gardens Real Estate.

***This document has examined Florida and Federal U.S. laws in effect in May 2011.